the multinationals: no strings attached

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The Multinationals: No Strings AttachedAuthor(s): Raymond VernonSource: Foreign Policy, No. 33 (Winter, 1978-1979), pp. 121-134Published by: Washingtonpost.Newsweek Interactive, LLCStable URL: http://www.jstor.org/stable/1148464 .

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THE MULTINATIONALS: NO STRINGS ATTACHED

by Raymond Vernon

Does the United States government have a policy toward American enterprises that own and manage subsidiaries abroad? Ac- cording to the Carter administration, such a policy does exist, and it amounts to a be- nign neutrality, an intention neither to promote nor to discourage overseas investment.

Most foreign observers would disagree. They see business and government in the United States as two facets of one system, single-mindedly devoted to promoting the military, industrial, and political interests of the country.

Most American businessmen would also disagree, but for different reasons. They see U.S. policy as hostile or, at best, indifferent, giving no effective support to American investors overseas, and allowing them regu- larly to be bested by foreign governments and companies.

In reality, however, U.S. policy is not nearly as clear as any of these interpreta- tions. Complex and contradictory, it man- ages to suffer most of the drawbacks of all three without the advantages that any one consistent line of policy might bring.

U.S. government policy toward overseas operations of American business has always been a confused medley. In support of its foreign enterprises, the United States has landed Marines in half-a-dozen Caribbean countries, threatened to cut off aid to several dozen others from Peru to Sri Lanka, and at some point put other forms of pressure on almost every one of the world's 159 sovereigns.

At the same time, however, the federal government repeatedly restrains U.S. firms

RAYMOND VERNON is a professor of international relations in the government department and at the business school of Harvard University.

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in the operation of their holdings in foreign countries; Du Pont, Gillette, Timken, and various other American companies have felt the sting of that policy. U.S. firms are required by law to disclose censurable political or commercial transactions abroad, an obli- gation that no other government imposes. And the federal government levies taxes on the foreign activities of American corpora- tions that, according to various studies, are more burdensome than the taxes of their foreign competitors.

Until World War II, seeming inconsis- tencies of this sort did not matter a great deal. Only a few U.S. companies had ex- tensive overseas investments. But in the three decades since the war, practically every one of America's largest firms has developed a substantial overseas network of subsidiaries and branches. The output of these overseas facilities has come to equal nearly 40 per cent of home output. In banking U.S. leaders have been writing as much as half their business overseas. All told, the foreign facilities of U.S. firms are valued at $150 billion and are generating a return flow of earnings to the United States of $12 to $14 billion annually. American exports of manufactured goods have become heavily reliant on the overseas subsidiaries of U.S. companies, while American imports of raw materials are also closely linked to the overseas networks.

Many Americans have argued that the U.S. economy might have been better off if multinational enterprises had never developed.' But multinational enterprises now play an extraordinarily important role in the American economy and are likely to maintain that position in the future. The question is whether the catch-as-catch-can policies of past decades are sufficient in the present situation.

1An exploration of the merits of that contention as well as of the future prospects of multinational enterprises appears in Raymond Vernon, Storm Over the Multinationals: The Real Issues (Cambridge: Har- vard University Press, 1977).

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A Case of Double Identity

From birth, the overseas subsidiaries of U.S. enterprises have displayed a confusing double identity. One identity is that of a

piece of property, the possession of a foreigner from another land. The other is that of a national of the country in which it is located, owing its rights as a business entity to the laws of that country. Chrysler of Britain, for example, is simultaneously the

property of U.S. Chrysler and the subject of Her Majesty the Queen.

Consider how the United States deals with Chrysler's double identity: The U.S. government would contend that British

Chrysler is entitled to the same treatment from the British government that British Leyland would receive. But British Chrysler is also supposedly entitled to the special privileges that go with being a foreign- owned property. In treaty jargon, the United States would hold out for most- favored-nation treatment for Chrysler-the best treatment accorded to the property of any foreigner.

In the same spirit, it is U.S. policy to support the canny American investor who has managed to negotiate a special deal for his foreign subsidiary or branch-a deal better than that of a national and better than that of other foreign-owned subsidiaries. That sort of deal, for instance, is common in developing countries, where foreigners have sometimes managed to negotiate for their local subsidiaries a long-term freeze on taxes or a long-term exemption from

import restrictions. In such cases, the U.S.

government expects to see such a contract honored, even if the privileges are unique.

The American subsidiaries that manage to acquire this dazzling panoply of rights are thereby elevated to a status above that of mere nationals; they become supernation- als, with all the rights of nationals and of foreigners combined. But because these U.S. firms are still viewed as foreigners in the countries where they operate, American am-

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bassadors see it as their right and duty to continue to protect them.

In fact, the U.S. government reserves the right not only to protect and promote subsidiaries in foreign lands but also on occasion to command and direct them. Accordingly, laws concerning trade with the enemy, corporate disclosure, bribery, and banking are all used to mold and restrain the activities of American-owned firms abroad.

The United States is not alone in its tendency to play upon the two personalities of overseas subsidiaries, drawing benefits from either wherever it can. Practically all governments try to secure the rights of nationals for their firms' overseas subsidiaries and branches, while using them for their own national ends. Government ministries in Paris routinely discuss with French companies the operations of their foreign branches; and French-owned businesses in other countries are systematically used, for instance, to gain control of new sources of raw materials for France. MITI, the Japa- nese Ministry of International Trade and Industry, engages that country's firms in the same kind of discussions, and exercises the same kind of guidance. Even the laissez-faire West German government, in a celebrated incident, pressured state-owned Volkswagen to shift some of its production from Brazil to West Germany, in order to cope with rising German unemployment.

Meanwhile, host governments often play the same game in reverse. They will insist as a matter of course that the foreign-owned firms on their territories must play the role of loyal subject, but then they will deny the businesses some of the loyal subject's rights. Britain, Japan, France, and Brazil, for instance, make no serious pretense of allowing foreign-owned subsidiaries on their soil- loyal subjects though the firms may be-to bid for local government contracts on a nondiscriminatory basis.

In recent years host countries have been pushing the game a major step further. For example, a foreign-owned subsidiary that

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manufactures automobiles in Mexico, although required to behave like any Mexican national, is nonetheless subject to special conditions based upon its status as a foreign- owned property. Such subsidiaries are com- manded to export more and import less, on pain of losing their right to sell in the Mexican market. As Mexican officials are aware, multinational enterprises adjust to pressures of this sort by changing the production schedules of their affiliates in other countries; if they export more and import less in Mexico, they export less and import more in Sao Paulo and Detroit.

The U.S. government reserves the right not only to protect and promote subsidiaries in foreign lands but also... to command and direct them.

Whenever an international transaction occurs and wherever international owner- ship exists, there is no way to avoid the problem of concurrent jurisdiction. Nations can insist as a matter of highest principle, as Latin American governments have done, that on their own turf their jurisdiction is inviolable, exclusive, and unqualified. But saying it does not make it so. Latin Ameri- can governments are still exposed to the measures of other sovereigns who exercise what they think to be their own inviolable rights of jurisdiction.

The realist may well ask whether the U.S. government should be greatly upset by the phenomenon of double jurisdiction. After all, in a world where power is still measured by the gun barrels behind it, the United States might be able to profit from the double identity of its overseas enterprises. Conceivably, the United States might be able to compel a little country like Costa Rica to treat its American-owned subsidiaries at least as well as Costa Rican firms, while insisting at the same time that those subsidiaries remain under the protection of

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and subject to the command of the U.S.

government. Just conceivably. But recent history sug-

gests that any such claim on the part of the United States would entail a very high cost. And if the United States sought to enforce similar claims on countries such as Mexico or Canada or France, the cost would likely be prohibitive.

Uncle Moneybags

When the U.S. government deals with the specific complaints of one of its aggrieved investors, its response bears little resemblance to the position that it espouses in the ab- stract. When foreign governments withhold national treatment or break a contract or violate some other basic tenet in the list of American principles, the U.S. government's tendency is to look the other way.

The disposition of the U.S. government to muffle its roar in such cases is not due to stupidity or indifference or hostility to American business. Instead, it reflects a basic limitation that pervades all areas of U.S. foreign policy. More so than any other country, the United States must juggle a wide range of conflicting interests in the conduct of its international relations. When Exxon's Peruvian subsidiary, the Interna- tional Petroleum Company, was threatened with expropriation in Peru during the 1960s, for instance, U.S. policy makers had to ask many thorny questions before they could decide how to react. Would a U.S. response hurt American fishing interests operating off the Peruvian shores? Would it push the Peruvian government to choose French planes for its air force? Would it precipitate a clamp-down on the 600 other American firms then operating in Peru? Would it lead Peru to vote against a variety of U.S. projects in United Nations organi- zations and elsewhere? Other countries also have to juggle multiple considerations such as these; but as a rule, their interests are much more narrowly focused than those of the United States.

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Experienced American businessmen, of course, know all this. Although they generally egg on U.S. negotiators to propose the contradictory and extravagant provisions summarized earlier, most are aware that such

provisions will afford very little protection in a pinch. And although they generally support coercive and punitive legislation against countries that are rough on foreign investors, such as the Hickenlooper amend- ment to foreign aid legislation, they are not

surprised when such legislation fails to work. In practice, therefore, U.S. firms rely very

little on the support of their government. American ambassadors and their staffs may be routinely used by some firms to open a few doors. But by and large, U.S. firms

keep their own counsel and hold the official U.S. establishment at arm's length. In the end only a small minority of American firms demand that the government wave a

big stick in support of their claims. What difference does it make, then, that

the United States repeatedly espouses its

implausible and inconsistent formulas for the protection of foreign direct investors?

One problem is that of imagery. At present, other countries are only too ready to see the United States as an aging and ar- thritic giant, still dangerous from its sheer bulk and weight, clinging to the symbols of its youthful hegemonic past. This is a view that enjoys considerable popularity not only in the developing countries but also in

Europe. It is reinforced by anachronistic exhortations of the United States in support of the foreign investor; and such reinforce- ment tends to hurt U.S.-owned foreign subsidiaries more often than it helps them.

Moreover, the U.S. government's uninhibited exhortations project a false view of American culture. Anyone with an international perspective is aware that, as national policies go, the United States is relatively tough on its large enterprises. As regards restrictive business practices, corporate taxation and disclosure, environmental and consumer protection, and business

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corruption, for example, the American approach is a good deal tougher than that of many countries, such as Sweden, France, and Mexico, that pretend to a more quali- fied attitude toward business. Nevertheless, when U.S. officials cast themselves in the uninhibited role of protectors and promoters of American enterprises abroad, the carica- ture of the United States as Uncle Money- bags is hard to suppress.

Another twist in this chain of ironies arises out of the U.S. government's pro- clivity for keeping a jurisdictional string on the overseas subsidiaries of American enterprises. To many Americans there is nothing anomalous in Washington's commanding a U.S.-owned subsidiary in a foreign country not to sell some technologically advanced product to the Soviet Union. It has not yet dawned on some in this country how grossly offensive such a policy may be to other governments. That lesson may be borne home one day if Saudi Arabia directs a Saudi-owned subsidiary in the United States to terminate its exports to Israel.

Even when the objective is not self- serving, the American practice of holding a string on overseas subsidiaries is likely to generate strong hostile reactions abroad. When the U.S. government attempts to prevent monopoly or to control business corruption or to promote human rights or to prevent environmental pollution abroad, its motives are usually mixed. The aim is partly an attempt to avoid giving the United States a bad name abroad, and partly a sense of the white man's mission. To a world that is mostly yellow and brown, America's persistent assertion of the missionary's role can be even more infuriating than a nar- row focus on its national self-interest.

One final count in this indictment of U.S. policy toward its foreign direct investors: It is true that only a small fraction of the investors have thought it useful to pursue their claims vigorously through the good offices of the American government. But U.S.-owned subsidiaries abroad now

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number more than 10,000. Even when only a fraction of these complain of dis- crimination, breach of contract, and illegal or unfair expropriation, American embas- sies abroad and the State Department at home become mired in an unending string of cases. In 1975 and 1976, for instance, over 150 cases of such disputes were re- ported. The pursuit of those cases, however equivocal and ineffectual in the end, has served as a constant irritant in relations between the United States and other countries, damaging the interests of the very enterprises that U.S. policy is intended to serve.

Unscrambling Personalities

The heart of the problem is the effort by the United States and other governments to have it both ways-to deal with overseas subsidiaries either as foreign properties or as nationals, depending on the governments' immediate interests. As multinational enterprises continue to grow and spread, the failure of countries to agree on how to un- scramble the two personalities of the foreign- owned firm will generate increasing conflict.

Governments would be taking a big step toward sorting out the two personalities if they could agree by treaty to some radically new principles governing the status of foreign-owned subsidiaries.

To begin with, governments should ac- knowledge as a general principle that foreign-owned affiliates lie wholly inside the jurisdiction of the countries in which the affiliates do business. In the spirit of such a principle, governments would bar themselves from making diplomatic representa- tions or using other forms of coercion in support of an enterprise located in another's jurisdiction. Governments would deny themselves the right to issue commands to such enterprises or to use them as vehicles for political intervention. They would, in short, subscribe to some of the key conditions that would allow others to look on the enterprises, despite their ties to foreign owners, as if they were nationals.

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Of course this simple formula would still leave most problems unresolved. For one thing, orphaned subsidiaries would still be the property of foreigners, and a world in which foreigners had no enforceable property rights abroad would be a world border- ing on anarchy. How would it be possible to provide a reasonable defense for that property interest?

Under the new regime proposed here, foreign-owned subsidiaries could no longer avail themselves of the protection and pro- motion of the governments of their parents. A prime reason for denying such subsidiaries the full rights of nationals would therefore have disappeared. Accordingly, a government may prove willing to exchange a commitment to provide national treatment-but no more than that-to the foreign-owned enterprises in its jurisdiction.

To a world that is mostly yellow and brown, America's persistent assertion of the missionary's role [is] infuriating.

To be sure, at this stage of history, the United States and most other countries will not be prepared to grant a totally unqualified form of national treatment for foreign- owned enterprises, even if those enterprises are wholly separated from the governments of their parents. At a minimum, nations will continue to want to carve out some security exceptions in favor of home-owned enterprises and are likely to be especially partial to such enterprises if they happen to be owned by the state. But a formula that offered the parent a reasonable expectation that its subsidiary would get some version of national treatment could easily be worth the price of separation from the government of the parent.

If the formula were to mean very much, of course, it would need some means of enforcement. Governments could agree to give foreign owners access to an international

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tribunal in order to deal with certain specific questions regarding the value of their foreign property. Foreign owners could ap- peal to the tribunal on grounds that their subsidiaries were being denied national treatment and that the value of their property was therefore being impaired. In the same spirit, foreign owners could have access to the tribunal if, upon being dispossessed of their property by expropriation, they felt they were inadequately paid off.

Mentioning the use of an international tribunal in this context may be tantamount in some quarters to waving a red flag in a bull ring. Those who have been exposed to the arcane tenets of international law will

recognize that this proposal touches on an- cient sensibilities, and challenges principles stained in blood. Latin American countries, for instance, have elevated the so-called Calvo doctrine-named for Carlos Calvo, a nineteenth-century Argentine diplomat and jurist-to a principle of the highest sanc- tity. According to that doctrine, any question bearing on a foreign-owned enterprise must be settled under the laws of the jurisdiction where the enterprise operates. It is Argentine law, therefore, that is used to settle the fate of Argentine enterprises, not the law of an international tribunal.

But the Calvo doctrine is the product of an era that no longer exists. It was con- ceived in a period in which any Latin American state facing an international tribunal would have been seen as a junior party, burdened by a sense of inferiority, lacking in talent and resources, and confront- ing a galaxy of high-priced, self-assured international lawyers backed up in the end by the ever-ready Marines.

Today, of course, these perceptions are profoundly changed. In most Latin Ameri- can countries, self-assurance and self-respect have grown enormously, as is evident to anyone who has followed recent disputes over foreign-owned enterprises. Besides, some Latin American countries, including Brazil, Mexico, and Colombia, are now not

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only the recipients but also the sources of foreign direct investment; each of these countries and others like them are rapidly developing their own modest crop of multinational enterprises. Perhaps more important, these countries have never been offered a proposal by the United States or other countries to orphan foreign-owned subsidiaries in return for some guaranteed rights for foreign investors; it may take just such a revolutionary proposal to end the days of the Calvo doctrine.

Feeble Instruments

Even if this package of commitments were negotiated, however, it would only deal with a part of the problem. Nothing that has been suggested thus far would restrain the growing propensity of countries to use the affiliates of multinational enterprises located inside their jurisdictions in ways that are hurtful to other countries. Nothing could prevent Mexico from following the course of action outlined earlier, demanding more exports or less imports of a foreign- owned affiliate and thus shifting Mexico's economic burdens to the backs of other countries. Nor is there anything in the package proposed so far that would prevent Japan from ordering its mining companies to put a lid on further development in Malaysia, if such a move served Japan's interests.

Although this kind. of problem is growing rapidly, it would appear that as yet very few developing countries are ready to take a hand in its solution. Most will insist on remaining free, for instance, to tweak the tail of the national subsidiary of IBM or General Electric through performance requirements and other devices, even if the tweaking generates pain in other countries.

In relations among advanced industrialized countries, however, some countermea- sures may be possible. Most of these nations now find themselves home base for some multinational enterprises as well as host to foreign-owned subsidiaries. France, there-

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fore, must worry not only about the designs of Alcoa in France but also about the fate of Pechiney in the United States.

In fact, the advanced industrialized countries have already shown some signs of moving, albeit hesitantly and grudgingly, toward the meshing of their discordant national policies. In certain cases, this meshing relates primarily to activities that involve foreign investors; in others, to activities that include both foreign-owned subsidiaries and domestically owned firms. Typical of such arrangements is a rapidly growing network of bilateral tax treaties, which resolve the most egregious conflicts in national tax laws. Another illustration is an agreement emerg- ing in the General Agreement on Tariffs and Trade (GATT), under which signatories will limit the use of domestic subsidies that harm other countries. Various consultative procedures in the Organization for Economic Cooperation and Development (OECD), notably in the fields of antitrust and security controls, illustrate the same tendency. There is even a so-called volun- tary code among OECD countries which, although a fairly feeble instrument in its present state, nevertheless aspires to reduce conflicts over the treatment and activities of multinational enterprises.

The biggest impediment to any serious movement toward the harmonization of governmental action so far has been a wide- spread failure to recognize the full dimensions of the problem. Politicians, scholars, and businessmen have persistently under- estimated what is involved. They have concentrated on the details of simple little codes and on building a new institution or two. But what will eventually be required is the creation of a set of new institutions at the international level that will collectively cover the whole range of major rela- tionships between business and government, from drug labeling and pollution to taxes and competition.

Once the problem is perceived in its full dimensions, it will be possible to face the

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disconcerting fact that each major subject may call for a separately tailored institu- tional approach. After all, within any national system, governments pursue their tax

problems through one set of institutions, their competition problems through another, their drug-labeling requirements through another, their environmental controls

through still another, and so on. Yet a common thread must link such

agreements. The objective of all of them would be twofold: to limit the national measures of any country, insofar as is possible, to the jurisdiction of the nation that initiated them; and to deal collectively with common problems that individual countries cannot effectively handle on their own. On these principles, for instance, an international accord on restrictive business practices would limit unilateral U.S. action in such matters to American turf; but it would lay down the standards and provide the

apparatus for dealing with those restrictive business practices that present a common international problem. A similar approach could be taken in corporate disclosure, security controls, banking regulations, and various other problem areas where trouble is likely to arise in the future. Each of these areas will require principles and institutions of its own. But the mechanisms in each case should restrain the jurisdictional reach of individual governments and provide an agreed response to common problems.

Skeptics, viewing the performance of the U.S. Congress and of European governments over the past few years, are entitled to their doubts. But if the skeptics are right, the conflicts generated by the growth and spread of foreign direct investment are likely to prove increasingly acute over the next few decades. No government can afford for

very long to hold itself aloof from the game of beggar-thy-neighbor, especially as others begin to play it with increasing skill and commitment. In that case, everybody will lose: host countries, home countries, and the multinational enterprises themselves.

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the multinationals: no strings attached

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